Goldman Sachs is cautioning its clients about the increasing likelihood of a government shutdown in Washington, which would mark the first in five years. In a report released on Sunday evening, the bank’s economists highlighted the factors that could contribute to such an event, including a narrow majority in the House, disagreements over spending levels, and potential complications arising from various political issues.
Goldman Sachs economists have assessed that a government shutdown is “more likely than not” to occur later this year, primarily due to emerging disputes regarding aid for Ukraine, funding for Justice Department investigations, and border security measures. The recent downgrade of the nation’s sovereign credit rating by Fitch Ratings has amplified these risks, further contributing to the potential for a shutdown.
Despite the concerns, Wall Street appears relatively unconcerned about the prospect of further political dysfunction in Washington. Historical precedent has shown that previous government shutdowns have not significantly impacted the stock market. Unlike the specter of a US debt default that loomed in June, a shutdown would be less detrimental to the broader US economy. This is because the government can continue to meet obligations such as Social Security payments and servicing interest and principal on the nation’s debt during a shutdown.
Goldman Sachs economists explained that the comparative manageability of a shutdown from a macroeconomic standpoint contrasts with the more severe consequences of a debt limit impasse, which previously prompted Congress to reach a compromise due to the potential dire economic ramifications.
However, the prospect of a shutdown could potentially decrease the urgency for politicians to reach a compromise on challenging decisions. The differences between a shutdown and a debt limit scenario that render a shutdown less damaging also increase its likelihood of occurring. The economists emphasized that while not inevitable, the timing and occurrence of a shutdown remain uncertain.
Already, certain conservative members of the House have expressed reservations about the duration of a short-term budget solution aimed at forestalling a shutdown. Some politicians have indicated they would be open to a shutdown if it serves their objective of reducing expenditures and addressing national debt concerns. Greg Valliere, Chief US Policy Strategist at AGF Investments, estimated a 60% chance of a government shutdown by December, noting potential challenges ahead for House Speaker Kevin McCarthy in maintaining party cohesion.